An important restructuring plan has been worked out by the large investors and sponsoring institutions for the $32 billion asset-backed commercial paper market (ABCP) that seized up last August. The current version of the restructuring plan places the investments in the 20 ABCP financial conduits under court protection.
It is now clear that the asset-backed commercial paper business was a scheme to fund highly risky loans with short-term borrowings without the full disclosure of the nature of the investment risk. Investors were led to believe that the ABCP instruments had a high probability of modest gains compared to government treasury bills and a low probability of loss. Unfortunately, the low probability failure option was grossly underplayed by those with an interest in earning huge fees.